UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended January 31, 1998
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-9618
NAVISTAR INTERNATIONAL CORPORATION
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 36-3359573
------------------------------ -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
455 North Cityfront Plaza Drive, Chicago, Illinois 60611
- -------------------------------------------------- -------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (312) 836-2000
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
APPLICABLE ONLY TO ISSUERS INVOLVED
IN BANKRUPTCY PROCEEDINGS DURING
THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes No
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS:
As of March 9, 1998, the number of shares outstanding of the registrant's
common stock was 49,113,774 and the Class B Common was 19,894,103.
- 1 -
NAVISTAR INTERNATIONAL CORPORATION
AND CONSOLIDATED SUBSIDIARIES
--------------------------
INDEX
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Page
Reference
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Part I. Financial Information:
Item 1. Financial Statements:
Statement of Income --
Three Months Ended January 31, 1998 and 1997............. 3
Statement of Financial Condition --
January 31, 1998 October 31, 1997 and January 31, 1997... 4
Statement of Cash Flow --
Three Months Ended January 31, 1998 and 1997............. 5
Notes to Financial Statements................................ 6
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition................ 12
Part II. Other Information:
Item 1. Legal Proceedings................................. 18
Item 6. Exhibits and Reports on Form 8-K.................. 18
Signature .................................................. 19
- 2 -
PART I - FINANCIAL INFORMATION
------------------------------
ITEM 1. Financial Statements
STATEMENT OF INCOME (Unaudited)
- -------------------------------------------------------------------------------
Millions of dollars, except per share data
- -------------------------------------------------------------------------------
Three Months Ended January 31
-----------------------------
Navistar International
Corporation and
Consolidated Subsidiaries
-------------------------
1998 1997
------ ------
Sales and revenues
Sales of manufactured products ................ $1,672 $1,240
Finance and insurance revenue ................. 45 45
Other income .................................. 10 11
------ ------
Total sales and revenues .................... 1,727 1,296
------ ------
Costs and expenses
Cost of products and services sold ............ 1,454 1,076
Postretirement benefits ....................... 45 51
Engineering and research expense .............. 35 30
Marketing and administrative expense .......... 98 83
Interest expense .............................. 17 17
Financing charges on sold receivables ......... 8 7
Insurance claims and underwriting expense ..... 9 8
------ ------
Total costs and expenses .................... 1,666 1,272
------ ------
Income before income taxes ................ 61 24
Income tax expense ........................ 23 9
------ ------
Net income .................................... 38 15
Less dividends on Series G preferred stock .... 7 7
------ ------
Net income applicable to common stock ......... $ 31 $ 8
====== ======
Earnings per share
Basic .................................... $ .43 $ .10
Diluted .................................. $ .42 $ .10
Average shares outstanding (millions)
Basic .................................... 71.6 73.6
Diluted .................................. 72.5 73.7
See Notes to Financial Statements.
- 3 -
STATEMENT OF FINANCIAL CONDITION (Unaudited)
- -------------------------------------------------------------------------------
Millions of dollars
- -------------------------------------------------------------------------------
Navistar International Corporation
and Consolidated Subsidiaries
-------------------------------------------
January 31 October 31 January 31
1998 1997 1997
------------ ---------- ----------
ASSETS
- -----------------------------------
Cash and cash equivalents ......... $ 188 $ 609 $ 197
Marketable securities ............. 361 356 448
------ ------ ------
549 965 645
Receivables, net .................. 1,543 1,755 1,311
Inventories ....................... 506 483 452
Property, net of accumulated
depreciation and amortization
of $876, $847 and $864........... 896 835 773
Investments and other assets ...... 312 332 238
Intangible pension assets ......... 212 212 314
Deferred tax asset, net .......... 911 934 1,024
------ ------ ------
Total assets ...................... $4,929 $5,516 $4,757
====== ====== ======
LIABILITIES AND SHAREOWNERS' EQUITY
- -----------------------------------
Liabilities
Accounts payable, principally trade $1,033 $1,100 $ 714
Debt:
Manufacturing operations ........ 125 92 113
Financial services operations ... 1,020 1,224 947
Postretirement benefits liability . 893 1,186 1,278
Other liabilities ................. 885 894 783
------ ------ ------
Total liabilities ............. 3,956 4,496 3,835
------ ------ ------
Commitments and contingencies
Shareowners' equity
Series G convertible preferred
stock (liquidation preference
$240 million) ................... $ 240 $ 240 $ 240
Series D convertible junior
preference stock (liquidation
preference $4 million) .......... 4 4 4
Common stock (55.4 and 51.0 million
shares issued) .................. 1,748 1,659 1,642
Class B Common stock (19.9 and 24.3
million shares issued) ......... 388 471 491
Retained earnings (deficit) ....... (1,271) (1,301) (1,425)
Common stock held in treasury,
at cost ......................... (136) (53) (30)
------ ------ ------
Total shareowners' equity ..... 973 1,020 922
------ ------ ------
Total liabilities $4,929 $5,516 $4,757
and shareowners' equity ......... ====== ====== ======
See Notes to Financial Statements.
- 4 -
STATEMENT OF CASH FLOW (Unaudited)
- -------------------------------------------------------------------------------
For the Three Months Ended January 31 (Millions of dollars)
- -------------------------------------------------------------------------------
Navistar International
Corporation and
Consolidated Subsidiaries
-------------------------
1998 1997
------ ------
Cash flow from operations
Net income ................................. $ 38 $ 15
Adjustments to reconcile net income
to cash used in operations:
Depreciation and amortization ............ 39 33
Deferred income taxes .................... 23 8
Postretirement benefits funding in excess
of expense ............................. (271) (71)
Other, net ............................... (34) (24)
Change in operating assets and liabilities:
Receivables .............................. (6) 37
Inventories .............................. (25) 11
Prepaid and other current assets ......... (10) (19)
Accounts payable ......................... (61) (106)
Other liabilities ........................ (25) (24)
------ ------
Cash used in operations .................... (332) (140)
------ ------
Cash flow from investment programs
Purchase of retail notes and lease
receivables .............................. (237) (196)
Collections/sales of retail notes
and lease receivables ................... 485 485
Purchase of marketable securities .......... (129) (165)
Sales or maturities of marketable
securities ............................... 128 113
Capital expenditures ....................... (60) (25)
Property and equipment leased to others .... (41) (16)
Other investment programs, net ............. 7 4
------ ------
Cash provided by investment programs ....... 153 200
------ ------
Cash flow from financing activities
Issuance of debt ........................... 48 79
Principal payments on debt ................. (24) (13)
Net decrease in notes and debt outstanding
under bank revolving credit facility
and asset-backed and other commercial
paper programs ........................... (211) (409)
Mexican credit facility .................... 35 -
Repurchase of common stock ................. (83) -
Dividends paid ............................. (7) (7)
------ ------
Cash used in financing activities .......... (242) (350)
------ ------
Cash and cash equivalents
Decrease during the period ............... (421) (290)
At beginning of the year ................. 609 487
------ ------
Cash and cash equivalents
at end of the period ..................... $ 188 $ 197
====== ======
See Notes to Financial Statements.
- 5 -
Navistar International Corporation and Consolidated Subsidiaries
Notes to Financial Statements (Unaudited)
Note A. Summary of Accounting Policies
Navistar International Corporation is a holding company whose principal
operating subsidiary is Navistar International Transportation Corp.
(Transportation). As used hereafter, "company" or "Navistar" refers to Navistar
International Corporation and its consolidated subsidiaries. The consolidated
financial statements include the results of the company's manufacturing
operations and its wholly owned financial services subsidiaries. The effects of
transactions between the manufacturing and financial services operations have
been eliminated to arrive at the consolidated totals.
The accompanying unaudited financial statements have been prepared in
accordance with accounting policies described in the 1997 Annual Report on Form
10-K and should be read in conjunction with the disclosures therein.
In the opinion of management, these interim financial statements reflect
all adjustments, consisting of normal recurring accruals, necessary to present
fairly the financial position, results of operations and cash flow for the
periods presented. Interim results are not necessarily indicative of results for
the full year. Certain 1997 amounts have been reclassified to conform with the
presentation used in the 1998 financial statements.
Note B. Supplemental Cash Flow Information
Consolidated interest payments during the first three months of 1998 and
1997 were $25 million and $22 million, respectively. There were no consolidated
tax payments made during the first three months of 1998 and 1997.
Note C. Income Taxes
The benefit of Net Operating Loss (NOL) carryforwards is recognized as a
deferred tax asset in the Statement of Financial Condition, while the Statement
of Income includes income taxes calculated at the statutory rate. The amount
reported does not represent cash payment of income taxes except for certain
state income, foreign withholding and federal alternative minimum taxes which
are not material. In the Statement of Financial Condition, the deferred tax
asset is reduced by the amount of deferred tax expense or increased by a
deferred tax benefit recorded during the year. Until the company has utilized
its significant NOL carryforwards, the cash payment of federal income taxes will
be minimal.
- 6 -
Navistar International Corporation and Consolidated Subsidiaries
Notes to Financial Statements (Unaudited)
Note D. Inventories
Inventories are as follows:
January 31 October 31 January 31
Millions of dollars 1998 1997 1997
- -------------------------------------------------------------------------------
Finished products.......... $ 253 $ 212 $ 246
Work in process............ 109 106 83
Raw materials and supplies. 144 165 123
-------- -------- --------
Total inventories.......... $ 506 $ 483 $ 452
======== ======== ========
Note E. Financial Instruments
In November 1997, Navistar Financial Corporation (NFC) sold $500 million of
retail notes, realizing proceeds of $477 million, net of underwriting fees and
credit enhancements, which were used for general working capital purposes. A
gain of approximately $7 million was recognized on the sale.
During the first quarter of 1998, NFC entered into a $50 million forward
treasury lock in anticipation of a May 1998 sale of retail receivables. NFC
intends to close this position on the pricing date of the sale. Any gain or loss
resulting from this transaction will be included in the gain or loss recognized
on the sale of receivables in May 1998.
In anticipation of the $250 million 10-year Senior Subordinated Note
offering, the company entered into four $50 million forward treasury locks
during the first quarter of 1998. The company closed these positions on the
pricing date of the debt resulting in a gain which was not material.
As of January 31, 1998, the company had open positions on future sales of
$103 million of 30-year Treasury bonds and future purchases of a
duration-weighted equivalent of 2-year Treasury bonds. These positions were
closed in February resulting in a gain which was not material.
The company purchases collateralized mortgage obligations (CMOs) that have
predetermined fixed-principal payment patterns which are relatively certain.
These instruments totaled $84 million at January 31, 1998. At January 31, the
unrecognized gain on the CMO's was not material.
- 7 -
Navistar International Corporation and Consolidated Subsidiaries
Notes to Financial Statements (Unaudited)
Note F. Earnings Per Share
Effective for Navistar's consolidated financial statements for the three
months ended January 31, 1998, Navistar adopted Statement of Financial
Accounting Standards No. 128, "Earnings per Share," which replaces the
presentation of primary earnings per share and fully diluted earnings per share
with a presentation of basic earnings per share and diluted earnings per share.
Basic earnings per share excludes dilution and is computed by dividing income
available to common shareowners by the weighted-average number of basic common
shares outstanding for the period. Diluted earnings per share assumes the
issuance of common stock for other potentially dilutive equivalent shares
outstanding. All prior-period earnings per share data has been restated. The
adoption of this new accounting standard did not have a material effect on the
company's reported earnings per share amounts.
Earnings per share was computed as follows:
For The Three Months Ended
January 31
------------------------------
Millions of dollars,
except share and per share data 1998 1997
- ------------------------------- -------- --------
Net income.............................. $ 38 $ 15
Less dividends
on Series G Preferred stock........... 7 7
-------- --------
Net income applicable to
common stock (Basic and Diluted)...... $ 31 $ 8
======== ========
Average shares outstanding (millions)
Basic.............................. 71.6 73.6
Dilutive effect
of options outstanding........ .8 -
Conversion of
Series D Preference Stock..... .1 .1
-------- --------
Diluted............................ 72.5 73.7
======== ========
Earnings per share
Basic.............................. .43 .10
Diluted............................ .42 .10
- 8 -
Navistar International Corporation and Consolidated Subsidiaries
Notes to Financial Statements (Unaudited)
Note F. Earnings Per Share (continued)
Unexercised employee stock options to purchase 0.7 million and 2.7 million
shares of Navistar common stock during the three months ended January 31, 1998
and 1997, respectively, were not included in the computation of diluted shares
outstanding because the options' exercise prices were greater than the average
market price of Navistar common stock during the respective periods.
Additionally, the diluted calculation excludes the effects of the conversion of
the Series G preferred stock as such conversion would produce anti-dilutive
results. In January 1998, the company repurchased approximately 3.2 million
shares of its Class B Common Stock from the Supplemental Trust.
Note G. New Accounting Pronouncements
In February 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits." This statement revises standards
for disclosures about pension and other postretirement benefit plans and is
effective for fiscal years beginning after December 15, 1997. This standard
expands or modifies disclosure and, accordingly will have no impact on the
company's reported financial position, results of operations and cash flows.
Note H. Subsequent Events
On February 4, 1998 the company completed the private placement of $100
million 7% Senior Notes due 2003 and $250 million 8% Senior Subordinated Notes
due 2008 (the Senior Notes, together with the Senior Subordinated Notes, the
"Old Notes"). The proceeds of the Senior Notes were used to prepay an 8% Secured
Note due 2002 and will be used to repay the 9% Sinking Fund Debentures due 2004.
The proceeds of the Senior Subordinated Notes were used to redeem the company's
$240 million, $6.00 Series G Convertible Cumulative Preferred Stock and to pay
accumulated and unpaid dividends thereon. Excess proceeds from both debt issues
will be used for general working capital purposes. On March 5, 1998, the company
initiated an offer to exchange the Old Notes with new notes (the "Exchange
Notes") which have been registered under the Securities Act of 1933, as amended.
The Exchange Notes will evidence the same debt as the Old Notes (which they
replace) and will be issued under and be entitled to the benefits of the
Indentures governing the Old Notes.
On March 5, 1998 the company announced that it has been selected to
negotiate an extended term agreement to supply diesel engines for select Ford
Motor Company under 8,500 lbs. GVW light duty trucks and sport utility vehicles.
- 9 -
Navistar International Corporation and Consolidated Subsidiaries
Notes to Financial Statements (Unaudited)
Note I. Supplemental Financial Information
Navistar International Corporation (with financial services operations on an
equity basis) in millions of dollars:
Three Months Ended
January 31
---------------------
Condensed Statement of Income 1998 1997
- -------------------------------------------- -------- -------
Sales of manufactured products.............. $ 1,672 $ 1,240
Other income................................ 10 10
-------- --------
Total sales and revenues.................... 1,682 1,250
-------- --------
Cost of products sold....................... 1,448 1,071
Postretirement benefits..................... 45 51
Engineering and research expense............ 35 30
Marketing and administrative expense........ 89 76
Other expenses.............................. 27 21
-------- --------
Total costs and expenses.................... 1,644 1,249
-------- --------
Income before income taxes
Manufacturing operations................. 38 1
Financial services operations............ 23 23
-------- --------
Income before income taxes............. 61 24
Income tax expense......................... 23 9
-------- --------
Net income................................. $ 38 $ 15
======== ========
Condensed Statement January 31 October 31 January 31
of Financial Condition 1998 1997 1997
- ----------------------------------- ---------- ---------- ----------
Cash, cash equivalents
and marketable securities........ $ 387 $ 802 $ 476
Inventories........................ 506 483 452
Property and equipment, net........ 733 706 656
Equity in financial services
subsidiaries..................... 329 322 319
Other assets....................... 876 864 689
Deferred tax asset, net............ 911 934 1,024
-------- -------- --------
Total assets.................. $ 3,742 $ 4,111 $ 3,616
======== ======== ========
Accounts payable,
principally trade................ $ 994 $ 1,060 $ 664
Postretirement benefits liabilities 885 1,178 1,270
Other liabilities.................. 890 853 760
Shareowners' equity................ 973 1,020 922
-------- -------- --------
Total liabilities
and shareowners' equity.... $ 3,742 $ 4,111 $ 3,616
======== ======== ========
- 10 -
Navistar International Corporation and Consolidated Subsidiaries
Notes to Financial Statements (Unaudited)
Note I. Supplemental Financial Information (continued)
Navistar International Corporation (with financial services operations on an
equity basis) in millions of dollars:
Three Months Ended
January 31
----------------------
Condensed Statement of Cash Flow 1998 1997
- ---------------------------------------------- -------- --------
Cash flow from operations
Net income.................................... $ 38 $ 15
Adjustments to reconcile net income to cash
used in operations:
Depreciation and amortization............ 32 29
Postretirement benefits funding
in excess of expense................... (271) (71)
Equity in earnings of nonconsolidated
companies, net of dividends received... (3) (14)
Deferred income taxes.................... 23 8
Other, net............................... (3) (7)
Change in operating assets and liabilities.... (124) (87)
-------- --------
Cash used in operations....................... (308) (127)
-------- --------
Cash flow from investment programs
Purchase of marketable securities............. (118) (150)
Sales or maturities of marketable securities.. 114 91
Capital expenditures.......................... (60) (25)
Receivable from Navistar Financial Corporation 3 (74)
Other investment programs, net................ 7 4
-------- --------
Cash used in investment programs.............. (54) (154)
-------- --------
Cash flow from financing activities........... (56) (10)
-------- --------
Cash and cash equivalents
Decrease during the period.................... (418) (291)
At beginning of the year...................... 573 452
-------- --------
Cash and cash equivalents at end of the period $ 155 $ 161
======== ========
- 11 -
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
Certain statements under this caption constitute "forward-looking
statements" under the Reform Act, which involve risks and uncertainties.
Navistar International Corporation's actual results may differ significantly
from the results discussed in such forward-looking statements. Factors that
might cause such a difference include, but are not limited to, those discussed
under the heading "Business Environment."
The company reported net income of $38 million, or $0.42 per diluted common
share, for the first quarter ended January 31, 1998 reflecting higher sales of
manufactured product. Net income was $15 million, or $.10 per diluted common
share, for the same period last year.
The company's manufacturing operations reported income before income taxes
of $38 million compared with pretax income of $1 million in the first quarter of
1997 reflecting an increase in demand for trucks. The financial services
operations' pretax income for the first three months of 1998 and 1997 was $23
million.
Sales and Revenues. First quarter 1998 industry retail sales of Class 5 through
8 trucks totaled 87,200 units, an increase of 21% from 1997. Class 8 heavy truck
sales of 53,300 units during the first quarter of 1998 were 26% higher than the
1997 level of 42,400 units. Industry sales of Class 5, 6 and 7 medium trucks,
including school buses, increased 14% to 33,900 units. Industry sales of school
buses, which accounted for 16% of the medium truck market, decreased 5%.
Sales and revenues for the first quarter of 1998 totaled $1,727 million,
33% higher than the $1,296 million reported for the comparable quarter in 1997.
Sales of trucks, mid-range diesel engines and service parts for the first
quarter of 1998 totaled $1,672 million compared with $1,240 million reported for
the same period in 1997.
The company maintained its position as sales leader in the combined United
States and Canadian Class 5 through 8 truck market with a 28.6% market share for
the first quarter of 1998, an increase from the 26.4% market share reported in
1997. (Sources: American Automobile Manufacturers Association, the United States
Motor Vehicle Manufacturers Association and R.L. Polk & Company.)
Shipments of mid-range diesel engines by the company to other original
equipment manufacturers during the first quarter of 1998 totaled 42,600 units, a
4% increase from the same period of 1997. Service parts sales of $185 million in
the first quarter of 1998 were consistent with the prior year's level.
Finance and insurance revenue was $45 million for both the first quarter of
1998 and 1997.
Costs and expenses. Manufacturing gross margin was 13.4% of sales for the
first quarter of 1998 consistent with 13.6% for the same period in 1997.
- 12 -
Marketing and administrative expense increased to $98 million in 1998 from
$83 million in the first quarter of 1997 reflecting investment in the
implementation of the company's truck strategy to reduce costs and complexity in
its manufacturing processes.
Postretirement benefits expense decreased to $45 million in 1998 from $51
million in the first quarter of 1997 mainly as a result of higher expected
return on plan assets.
Engineering and research expense increased $5 million from first quarter
1997 to $35 million, reflecting the company's investment in its next generation
vehicle program.
Liquidity and Capital Resources
Cash flow is generated from the manufacture and sale of trucks, mid-range
diesel engines and service parts as well as product financing and insurance
coverage provided to the company's dealers and retail customers by the financial
services operations.
Historically, funds to finance the company's products are obtained from a
combination of commercial paper, short- and long-term bank borrowings, medium-
and long-term debt issues, sales of finance receivables and equity capital.
NFC's current debt ratings have made sales of finance receivables the most
economical source of funding.
Insurance operations are funded through internal operations.
Total cash, cash equivalents and marketable securities of the company
amounted to $549 million at January 31, 1998, $965 million at October 31, 1997
and $645 million at January 31, 1997.
Cash used in operations during the first quarter of 1998 totaled $332
million, primarily from excess postretirement benefits funding of $271 million
and from a net change in operating assets and liabilities of $127 million.
During the first quarter, the company contributed $200 million to the Retiree
Health Care Base Plan Trust and $100 million to the hourly pension plan, which
net of expense, resulted in funding of $193 million and $78 million,
respectively. The net change in operating assets and liabilities includes a $61
million decrease in accounts payable resulting from lower production.
Investment programs provided $153 million in cash reflecting a net decrease
in retail notes and lease receivables of $248 million. Other investment
activities used $41 million for property and equipment leased to others and $60
million to fund capital expenditures for construction of a truck assembly
facility in Mexico, to increase mid-range diesel engine capacity and for truck
product improvements.
Financing activities used cash to pay $7 million in dividends on the Series
G Preferred shares and to reduce notes and debt outstanding under the bank
revolving credit facility and asset-backed and other commercial paper program by
$211 million offset by a $24 million net increase in long-term debt at NFC
primarily due to increased capital lease funding and by $35 million of
borrowings under the Mexican credit facility. In addition, $83 million was used
to repurchase 3.2 million shares of Class B common stock during January 1998.
- 13 -
Receivable sales were a significant source of funding in 1998 and 1997.
During the first quarter of 1998 and of 1997, NFC sold $500 million and $486
million, respectively, of retail notes through Navistar Financial Retail
Receivables Corporation (NFRRC). NFRRC has filed registration statements with
the Securities and Exchange Commission which provide for the issuance of up to
$5,000 million of asset-backed securities. At January 31, 1998, the remaining
shelf registration available to NFRRC was $973 million.
During the first quarter of fiscal 1998, NFC entered into a $50 million
forward treasury lock in anticipation of a May 1998 sale of retail receivables.
NFC intends to close this position on the pricing date of the sale. Any gain or
loss resulting from this transaction will be included in the gain or loss
recognized on the sale of receivables in May 1998.
As of January 1998, Navistar Financial Securities Corporation ("NFSC"), a
wholly-owned subsidiary of NFC had in place a $531 million revolving wholesale
note trust that provides for the continuous sale of eligible wholesale notes on
a daily basis. During the next few months $31 million will amortize and the
commitment will be $500 million. At January 31, 1998, the remaining shelf
registration available to NFSC for the issuance of investor certificates was
$200 million.
At January 31, 1998, available funding under NFC's amended and restated
credit facility and the asset-backed commercial paper facility was $767 million,
of which $115 million was used to back short-term debt at January 31, 1998. The
remaining $652 million, when combined with unrestricted cash and cash
equivalents made $658 million available to fund the general business purposes of
NFC at January 31, 1998.
As of January 31, 1998, the company had open positions on future sales of
$103 million of 30-year Treasury bonds and future purchases of a
duration-weighted equivalent of 2-year Treasury bonds. These positions were
closed in February resulting in a gain which was not material.
The company purchases collateralized mortgage obligations (CMOs) that have
predetermined fixed-principal payment patterns which are relatively certain.
These instruments totaled $84 million at January 31, 1998. At January 31, the
unrecognized gain on the CMO's was not material.
In November 1997, the company's Mexican subsidiary established a $125
million credit facility to be used to fund the development of the company's
Mexican operations.
The company had outstanding capital commitments of $107 million at January
31, 1998, primarily for increased manufacturing capacity at the Indianapolis
engine plant, improvements to existing facilities and products, and for
construction of a truck assembly facility in Mexico.
- 14 -
In January 1998, Moody's, Standard and Poors and Duff and Phelps raised
Transportation's senior debt ratings from Ba2, BB, and BB to Ba1, BB+ and BB+,
respectively. NFC's senior debt ratings increased from Ba2, BB and BB+ to Ba1,
BB+ and BBB-. NFC's subordinated debt ratings were also raised from B1, B+ and
BB to Ba3, BB- and BB+, respectively.
On February 4, 1998 the company completed the private placement of $100
million 7% Senior Notes due 2003 and $250 million 8% Senior Subordinated Notes
due 2008 (the Senior Notes, together with the Senior Subordinated Notes, the
"Old Notes"). The net proceeds from the sale of the Senior Notes were
approximately $98 million (after deducting discounts to initial purchasers and
expenses of the offering). The company used approximately $27 million to repay
the 8% Secured Note due 2002 including accrued interest and expects to use
approximately $47 million to repay the 9% Sinking Fund Debentures due 2004
including accrued interest. The net proceeds from the sale of the Senior
Subordinated Notes (after deducting discounts to the initial purchasers and
expenses in connection with the offering) were approximately $244 million and
were used to redeem the company's Series G Convertible Cumulative Preferred
Stock and to pay accumulated and unpaid dividends thereon. Any remaining
proceeds will be used for general corporate purposes, including working capital.
Although the issuance of the new debt will result in higher interest costs, the
redemption of the Series G Preferred Stock eliminates the payment of the $6.00
per share annual preferred dividend. On March 5, 1998, the company initiated an
offer to exchange the Old Notes with new notes (the "Exchange Notes") which have
been registered under the Securities Act of 1933, as amended. The Exchange Notes
will evidence the same debt as the Old Notes (which they replace) and will be
issued under and be entitled to the benefits of the Indentures governing the Old
Notes.
In anticipation of the $250 million 10-year Senior Subordinated Note
offering, the company entered into four $50 million forward treasury locks
during the first quarter of fiscal 1998. The company closed these positions on
the pricing date of the debt resulting in a gain which was not material.
Management continues to evaluate current and forecasted cash flow as a
basis for financing operating requirements and capital expenditures. Management
believes that collections on the outstanding receivables portfolios as well as
funds available from various funding sources will permit the financial services
operations to meet the financing requirements of the company's dealers and
customers.
Year 2000
The company has identified all significant applications that will require
modification to ensure Year 2000 compliance. Internal and external resources are
being used to make the required modifications and test Year 2000 compliance. The
company plans to complete the modifications and testing process of all
significant applications by July 1999, which is prior to any anticipated impact
on its operating systems. The total cost of the Year 2000 project has not been
and is not anticipated to be material to the company's financial position or
results of operations and will be funded through operating cash flows.
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The costs of the project and the date on which the company believes it will
complete the Year 2000 modifications are based on management's best estimates,
which were derived utilizing numerous assumptions of future events, including
the continued availability of certain resources, third party modification plans
and other factors. However, there can be no guarantee that these estimates will
be achieved and actual results could differ materially from those anticipated.
Specific factors that might cause such material differences include, but are not
limited to, the availability and cost of personnel trained in this area, the
ability to locate and correct all relevant computer codes, and similar
uncertainties.
In addition, the company has communicated with others with whom it does
significant business to determine their Year 2000 compliance readiness and the
extent to which the company is vulnerable to any third party Year 2000 issues.
However, there can be no guarantee that the systems of other companies on which
the company's systems rely will be timely converted, or that a failure to
convert by another company, or a conversion that is incompatible with the
company's systems, would not have a material adverse affect on the company.
New Accounting Pronouncements
In February 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits." This statement revises standards
for disclosures about pension and other postretirement benefit plans and is
effective for fiscal years beginning after December 15, 1997. This standard
expands or modifies disclosure and, accordingly will have no impact on the
company's reported financial position, results of operations and cash flows.
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Business Environment
Sales of Class 5 through 8 trucks are cyclical, with demand affected by
such economic factors as industrial production, construction, demand for
consumer durable goods, interest rates and the earnings and cash flow of dealers
and customers. Reflecting the stability of the general economy, demand for new
trucks remained strong during the first quarter of 1998. An improvement in the
number of new truck orders has increased the company's order backlog to 60,600
units at January 31, 1998 from 29,200 units at January 31, 1997. Retail
deliveries in 1998 continue to be highly dependent on the rate at which new
truck orders are received. The company will evaluate order receipts and backlog
throughout the year and will balance production with demand as appropriate.
A stronger than expected economy has led the company to increase its
estimates of demand. The company currently projects 1998 United States and
Canadian Class 8 heavy truck demand to be 220,000 units, a 12% increase from
1997. Class 5, 6 and 7 medium truck demand, excluding school buses, is forecast
at 123,000 units, a 5% increase from 1997. Demand for school buses is expected
to decline slightly in 1998 to 33,000 units. Mid-range diesel engine shipments
by the company to original equipment manufacturers in 1998 are expected to be
215,300 units, 17% higher than in 1997. The company's service parts sales are
projected to grow 8% to $870 million.
At the currently forecasted 1998 demand of 376,000 units, the entire truck
industry is operating at or near capacity while the company's manufacturing
facilities are near capacity. Additionally, constraints have been placed on the
company's ability to meet certain customers' demands because of component parts
availability.
On March 5, 1998 the company announced that it has been selected to
negotiate an extended term agreement to supply diesel engines for select Ford
Motor Company under 8,500 lbs. GVW light duty trucks and sport utility vehicles.
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Navistar International Corporation and Consolidated Subsidiaries
PART II - OTHER INFORMATION
---------------------------
Item 1. Legal Proceedings
Incorporated herein by reference from Item 3 - "Legal Proceedings"
in the company's definitive Form 10-K dated December 22, 1997,
Commission File No. 1-9618.
Item 6. Exhibits and Reports on Form 8-K
10-Q Page
---------
(a) Exhibits:
3. Articles of Incorporation
and By-Laws E-1
4. Instruments Defining
The Rights of Security Holders,
Including Indentures E-2
10. Material Contracts E-3
(b) Reports on Form 8-K:
No reports on Form 8-K were
filed for the three months
ended January 31, 1998.
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SIGNATURE
---------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
NAVISTAR INTERNATIONAL CORPORATION
- ----------------------------------
(Registrant)
/s/ J. Steven Keate
- ----------------------------------
J. Steven Keate
Vice President and Controller
(Principal Accounting Officer)
March 17, 1998
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